You’ve probably heard the term short sale a lot recently. But do you know what it is? John Anastasio is an attorney at the Law Offices Of John Anastasio in Stuart, Florida, explains here.
Short sales are essentially what happens when homeowners tell banks that they will allow their homes to be sold for less money than what is currently owed on their mortgages. Although this can simplify things on one hand—if the homeowner is able to sell the house for its actual value—it can make things more complicated, as well.
Even if a bank agrees to reduce the amount it’s asking a homeowner to repay on a mortgage and wave the deficiency judgment altogether—which a lot of times they will not do, even talking about the best case scenario, there could still be problems.
The banking and real estate systems are still adjusting from all the growth in the foreclosure industry over the past year and a half, so they just can’t keep up with all these new short sales right now. They can’t even process all of them. So what happens all too often is that a mortgage lender or servicer would rather force a homeowner into foreclosure than try to negotiate a deal that works for both parties. They would do this simply because they will make more money that way. That is one reason why short sales can be so complex and difficult to come by.
I generally find that most clients are better off getting what is called a deed in lieu of foreclosure rather than going through a short sale. Negotiating that, you turn back the house to the bank, wave the deficiency and try to get rid of the credit block. Although short sales have their role in the marketplace, I believe that quite frankly there are so many booby traps with these things that I’d be terribly concerned about going through with one. And if you don’t know what you’re doing when putting your home up for sale as a short sale, then you could be in some serious trouble.
The mortgages that people signed on for involve a lot more than just a small bank and a borrower. Because of things like securitization—where the banks packaged up 95% these mortgages and dumped them on the secondary mortgage market—you have now got the banks and their lawyers on one side, the homeowner or borrower on the other, and the servicers in the middle whose job it is to collect the money no matter what. So that isn’t good for the individual homeowner or the economy in general.
Not only do we have all these players, but you also need to add in two players on top of those people. Number one among these players is the realtors—both the buyer’s broker as well as the seller’s—and you’re also going to have the potential buyers themselves. To complicate things even more, for those people who may carry private mortgage insurance, you’ve got to negotiate with the private mortgage insurance carrier (PMI), too.
There is a rule of thumb in negotiations where for every party you add to a negotiation you double the length of time to negotiate, which is why you may see these multi-country negotiations that take 10 years or more. Obviously, that’s a different topic they’re negotiating on—but it’s an example.
So in these mortgage negotiations you have two brokers, you have their client, you have got a buyer—and at a negotiation where private mortgage insurance is involved you have the bank, as well. It gets mind-boggling in terms of getting everyone to agree on whether a seller should be able to do a short sale at all.
On top of that, you have often got the problem where realtors are just trying to unload these properties really quickly and make another buck like they did on the way down. So that is another factor complicating the mess when determining whether a seller facing mortgage trouble should be able to hold a short sale.
Many people who say OK to a short sale think it’s going to be the end of their problems. But what’s actually happening is they may still owe the difference on the mortgage. On top of that, these mortgage problems are crashing their credit. And all they’ve done by holding a short sale is sold the house for the bank. They have done the work for the bank, essentially.
